Abstract
This Selected Issues paper for Peru shows that during the years of strong growth and high commodity prices, the Peruvian authorities have conducted a prudent fiscal policy, maintaining a broadly neutral fiscal stance. During 2004–08, while the revenue-to-GDP ratio increased 3.7 percentage points, the expenditure ratio rose only 0.9 percentage points. Expenditure control focused on current spending and coincided with increasing government investment aimed at enhancing public access to infrastructure and social services. Fiscal policy has also outperformed budgets approved by congress, owing to higher-than-anticipated revenue, as well as the need to limit inflation pressures.
V. Balance Sheet Vulnerabilities in a Dollarized Economy35
41. Peru’s balance sheets have shown significant resilience to global financial turmoil over the last decade. In 2000–01, Peru weathered well the global shocks that adversely affected other Latin American countries, with the economy remaining stable and even achieving robust growth, even though it ranked as one of the most dollarized in the region.36 As shown by Rosenberg et al (2005), much of this resilience hinged from the central bank’s reserve buffer, which helped contain external rollover risks and avoid the negative expectations that could cause self-fulfilling bank runs.
Real GDP in selected Latin American countries
(1995=100)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: International Financial Statistics and staff’s calculations.Real GDP in selected Latin American countries
(1995=100)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: International Financial Statistics and staff’s calculations.Real GDP in selected Latin American countries
(1995=100)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: International Financial Statistics and staff’s calculations.42. In more recent years, Peru’s international investment position has continued to strengthen significantly. Between end-2005 and end-September in 2008, the economy’s net international liabilities fell from 33 percent of GDP (US$26.3 billion) to 23 percent of GDP (US$29 billion). The improvement was, however, not uniform across all sectors—with the combined public sector turning from a net liability position of about 10¼ percent of GDP into a net asset position of 12½ percent of GDP, while private positions recorded some increase in their net liabilities.
43. This note examines the evolution of the balance sheets in different sectors. It shows that while some important vulnerabilities are still present, most sectors have continued to post improvements in their balance sheets, including through the strengthening of their net foreign currency and net-short term positions. Nonetheless, it is also apparent that the very significant international reserve buffer built by the central bank in recent years continues to play a crucial role in ensuring the overall resilience of the Peruvian economy.
Peru: International Investment Position
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Peruvian authorities and staff’s calculations.Peru: International Investment Position
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Peruvian authorities and staff’s calculations.Peru: International Investment Position
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Peruvian authorities and staff’s calculations.A. Public Sector
44. The public sector balance sheet gained much resilience in recent years. The authorities’ strategy has involved active public debt reductions of over US$3.5 billion, including through two pre-payments of Brady bonds in 2007–08. As a result, total public debt fell from 37¾ percent of GDP in 2005 to 23¾ percent of GDP in September 2008; the average maturity of public debt has risen to around 11½ years, and the share of foreign-currency denominated debt declined from 75 percent in 2005 to around 60 percent. Moreover, the combined public sector has become a net external creditor since mid-2007, overcoming its long-standing currency mismatch. At the same time, traditional external and financial vulnerability indicators suggest that Peru’s rising reserve buffer has strengthened the economy’s shield against temporary external and financial sector shocks.
Peru: Net International Position - Combined Public Sector
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Peruvian authorities and staff’s estimates.Peru: Net International Position - Combined Public Sector
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Peruvian authorities and staff’s estimates.Peru: Net International Position - Combined Public Sector
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Peruvian authorities and staff’s estimates.45. Nonetheless, some vulnerabilities remain—mainly related to a potential emergence of contingent liabilities in the financial sector. In particular, risks stem mostly from the liabilities that, for example, could be generated in the case of a large systemic shock in the banking system, which held some US$16.7 billion in foreign currency deposits as of mid-November 2008.37 Under this hypothetical case, the central government would be responsible to cover the US dollar-denominated deposits legally protected under the Deposit Insurance Fund (DIF)—amounting to about US$9.2 billion—especially as the DIF’s resources currently stand only at about 2 percent of total insured deposits.
Peru. External and Financial Vulnerability Indicators 1/2/
(in percent)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Peruvian authorities and staff estimates.1/ Short-term debt evaluated at residual maturities2/ Current Account balance adjusted by 0.75*FDI, and set equal to zero when in surplus.Peru. External and Financial Vulnerability Indicators 1/2/
(in percent)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Peruvian authorities and staff estimates.1/ Short-term debt evaluated at residual maturities2/ Current Account balance adjusted by 0.75*FDI, and set equal to zero when in surplus.Peru. External and Financial Vulnerability Indicators 1/2/
(in percent)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Peruvian authorities and staff estimates.1/ Short-term debt evaluated at residual maturities2/ Current Account balance adjusted by 0.75*FDI, and set equal to zero when in surplus.B. Banking Sector
46. Peru’s high dollarization has long posed important risks to the banking system, but these are well-covered by central bank’s reserves. The natural mismatch between the banks’ short-term FX liabilities and their FX short-term assets has risen moderately in nominal terms—by US$3.7 billion-over the last three years. However, bank’s reserve deposits at the central bank, along with the central bank’s own net foreign position provide more than sufficient coverage to these liabilities. Moreover, the banking sector has become significantly less dollarized in recent years, particularly in the case of sectors without natural hedges (such as consumption and services). The share of foreign-currency denominated loans over total loans has remained have remained stable only for over 4 percent of the total portfolio—allocated to highly-hedged sectors (such as mining).
Peru: Liquid Dollar Assets Versus Bank’s Short-Term Dollar Liabilities
(In millions of US dollars)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Peruvian Authorities and staff’s estimates.Peru: Liquid Dollar Assets Versus Bank’s Short-Term Dollar Liabilities
(In millions of US dollars)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Peruvian Authorities and staff’s estimates.Peru: Liquid Dollar Assets Versus Bank’s Short-Term Dollar Liabilities
(In millions of US dollars)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Peruvian Authorities and staff’s estimates.Peru: Bank Loans and Dollarization Coefficient per Economic Sector
In millions of Nuevos Soles, unless otherwise indicated
As of end-November.
Peru: Bank Loans and Dollarization Coefficient per Economic Sector
In millions of Nuevos Soles, unless otherwise indicated
| Type of Loan | 2001 | 2005 | 2008 1/ | ||||
|---|---|---|---|---|---|---|---|
| Total | Dollarization coefficient (in percent) | Total | Dollarization coefficient (in percent) | Total | Dollarization coefficient (in percent) | ||
| Commercial and to Microenterprises | 30.3 | 82 | 30.9 | 74 | 62.6 | 66 | |
| Primary Sector | 2.2 | 93 | 2.5 | 86 | 3.3 | 78 | |
| Mining | 2.4 | 95 | 2.1 | 95 | 4.2 | 97 | |
| Manufacturing | 8.5 | 86 | 10.0 | 81 | 18.0 | 70 | |
| Construction | 1.1 | 80 | 0.8 | 85 | 2.0 | 76 | |
| Commerce | 6.7 | 71 | 6.0 | 62 | 13.7 | 58 | |
| Services | 8.0 | 81 | 8.9 | 68 | 19.5 | 61 | |
| Other | 1.4 | 75 | 0.6 | 55 | 1.8 | 49 | |
| Mortgages | 3.6 | 95 | 6.5 | 96 | 10.3 | 71 | |
| Consumption | 3.2 | 51 | 6.3 | 32 | 17.2 | 19 | |
As of end-November.
Peru: Bank Loans and Dollarization Coefficient per Economic Sector
In millions of Nuevos Soles, unless otherwise indicated
| Type of Loan | 2001 | 2005 | 2008 1/ | ||||
|---|---|---|---|---|---|---|---|
| Total | Dollarization coefficient (in percent) | Total | Dollarization coefficient (in percent) | Total | Dollarization coefficient (in percent) | ||
| Commercial and to Microenterprises | 30.3 | 82 | 30.9 | 74 | 62.6 | 66 | |
| Primary Sector | 2.2 | 93 | 2.5 | 86 | 3.3 | 78 | |
| Mining | 2.4 | 95 | 2.1 | 95 | 4.2 | 97 | |
| Manufacturing | 8.5 | 86 | 10.0 | 81 | 18.0 | 70 | |
| Construction | 1.1 | 80 | 0.8 | 85 | 2.0 | 76 | |
| Commerce | 6.7 | 71 | 6.0 | 62 | 13.7 | 58 | |
| Services | 8.0 | 81 | 8.9 | 68 | 19.5 | 61 | |
| Other | 1.4 | 75 | 0.6 | 55 | 1.8 | 49 | |
| Mortgages | 3.6 | 95 | 6.5 | 96 | 10.3 | 71 | |
| Consumption | 3.2 | 51 | 6.3 | 32 | 17.2 | 19 | |
As of end-November.
47. The banking sector’s balance sheet has also gained resilience against currency-related shocks. While total credit dollarization remains high at 56 percent, the ongoing de-dollarization process has contributed to a reduction of the foreign-exchange induced credit risk, particularly that stemming from unhedged borrowers. Relative to 2005, banks have also become more resilient to a depreciation of the local currency. However, with banks having reduced their net foreign exchange asset position in US dollars since 2007, a depreciation event would have a slightly higher negative impact on the system’s capitalization than it would have had a year ago.
Peru: Banking sector stress test to currency-related risks 1/2/
Data as of December 2004.
Both the 2005 FSAP Update and the SBS methodology determined the 20 percent depreciation by the 99 percent confidence level of the normalized distribution of the monthly changes in the exchange rate in the period January 1997 to December 2004, and January 1991 to February 2006 respectively.
Peru: Banking sector stress test to currency-related risks 1/2/
| Market Exchange Rate Risk | Foreign-Exchange Induced Credit Risk | |||||
| 2005 FSAP Update 1/ | June 2007 | August 2008 | 2005 FSAP Update 1/ | June 2007 | August 2008 | |
| Initial Banking System CAR | 13.5 | 12.1 | 12.4 | 13.5 | 12.1 | 12.4 |
| New Banking System CAR | 11.8 | 12.0 | 12.2 | 9.9 | 10.2 | 11.2 |
| Change in CAR (in percent) | -12.6 | -0.8 | -1.5 | -26.7 | -15.7 | -9.9 |
| Memorandum Items | ||||||
| Share of Loans in Foreign Currency (percent) | 75.7 | 65.0 | 58.9 | |||
| Net Foreign Exchange Open Position / Capital | 24.2 | 28.6 | 10.8 | |||
| Stress Scenario 2/ | 20 percent depreciation | |||||
Data as of December 2004.
Both the 2005 FSAP Update and the SBS methodology determined the 20 percent depreciation by the 99 percent confidence level of the normalized distribution of the monthly changes in the exchange rate in the period January 1997 to December 2004, and January 1991 to February 2006 respectively.
Peru: Banking sector stress test to currency-related risks 1/2/
| Market Exchange Rate Risk | Foreign-Exchange Induced Credit Risk | |||||
| 2005 FSAP Update 1/ | June 2007 | August 2008 | 2005 FSAP Update 1/ | June 2007 | August 2008 | |
| Initial Banking System CAR | 13.5 | 12.1 | 12.4 | 13.5 | 12.1 | 12.4 |
| New Banking System CAR | 11.8 | 12.0 | 12.2 | 9.9 | 10.2 | 11.2 |
| Change in CAR (in percent) | -12.6 | -0.8 | -1.5 | -26.7 | -15.7 | -9.9 |
| Memorandum Items | ||||||
| Share of Loans in Foreign Currency (percent) | 75.7 | 65.0 | 58.9 | |||
| Net Foreign Exchange Open Position / Capital | 24.2 | 28.6 | 10.8 | |||
| Stress Scenario 2/ | 20 percent depreciation | |||||
Data as of December 2004.
Both the 2005 FSAP Update and the SBS methodology determined the 20 percent depreciation by the 99 percent confidence level of the normalized distribution of the monthly changes in the exchange rate in the period January 1997 to December 2004, and January 1991 to February 2006 respectively.
C. Corporate Sector
48. In the nonfinancial corporate sector, the average firm has significantly improved its net foreign position in recent years, particularly at the short-end. Available data on a sample of over 120 nonfinancial sector corporates38 suggest that the average firm’s negative net foreign liability position narrowed by about US$19 billion between 2000 and 2006, while the average short term position turned into net assets in the same period. This accompanied a more general tendency to de-leverage, in both local and foreign currencies.
Peru: Corporate Sector - Net Foreign Position of the Average Firm
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Economatica and staff calculations (see Kamil, 2008).Peru: Corporate Sector - Net Foreign Position of the Average Firm
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Economatica and staff calculations (see Kamil, 2008).Peru: Corporate Sector - Net Foreign Position of the Average Firm
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Economatica and staff calculations (see Kamil, 2008).49. Improvements were reflected both for corporates in the exporting and nonexporting sectors. Owing to its natural hedges, the average exporting firm presented both smaller net foreign currency liabilities and short-term currency liabilities than the nonexporting sector. Nonetheless, the average firm in both types of sector significantly reduced its net liability position between 2000 and 2006—and both types of firms had turned their net short-term liability positions into net short-term asset position by 2005–06, thus significantly reducing their overall exposure to exchange-rate related shocks.
Peru: Export Sector - Net Foreign Position of the Average Firm
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Economatica and staff calculations (see Kamil, 2008).Peru: Export Sector - Net Foreign Position of the Average Firm
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Economatica and staff calculations (see Kamil, 2008).Peru: Export Sector - Net Foreign Position of the Average Firm
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Economatica and staff calculations (see Kamil, 2008).
Peru: Non-Export Sector - Net Foreign Position of the Average Firm
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Economatica and staff calculations (see Kamil, 2008).Peru: Non-Export Sector - Net Foreign Position of the Average Firm
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Economatica and staff calculations (see Kamil, 2008).Peru: Non-Export Sector - Net Foreign Position of the Average Firm
(In US$ million)
Citation: IMF Staff Country Reports 2009, 041; 10.5089/9781451831184.002.A005
Source: Economatica and staff calculations (see Kamil, 2008).D. Household Sector
50. At the household level, foreign-currency exposures emerge from the presence of consumer and mortgage credit in US dollars. Using consumer and mortgage loan data to approximate the pattern of household indebtedness suggests that foreign-currency exposures have declined consistently since the beginning of the decade. In particular, nonhedged borrowers have moved toward debt in local currency, although the total level of indebtedness per household has risen.
Peru: Consumer and Mortgage Loans
(In thousands of Soles, unless otherwise indicated)
As of end-November.
Peru: Consumer and Mortgage Loans
(In thousands of Soles, unless otherwise indicated)
| Loans | Number of Debtors | Total Loans | Loan per Capita | ||||
|---|---|---|---|---|---|---|---|
| Local Currency | Foreign Currency | Local Currency | Foreign Currency | ||||
| Mortgage | |||||||
| 2001 | 33,284 | 185,913 | 3,390,328 | 5.6 | 101.9 | ||
| 2005 | 66,555 | 274,734 | 6,196,406 | 4.1 | 93.1 | ||
| 2008 1/ | 104,791 | 2,973,401 | 7,323,359 | 28.4 | 69.9 | ||
| Consumer | |||||||
| 2001 | 1,154,317 | 1,560,580 | 1,638,868 | 1.4 | 1.4 | ||
| 2005 | 1,938,821 | 4,269,238 | 2,008,523 | 2.2 | 1.0 | ||
| 2008 1/ | 4,277,283 | 13,940,206 | 3,273,927 | 3.3 | 0.8 | ||
As of end-November.
Peru: Consumer and Mortgage Loans
(In thousands of Soles, unless otherwise indicated)
| Loans | Number of Debtors | Total Loans | Loan per Capita | ||||
|---|---|---|---|---|---|---|---|
| Local Currency | Foreign Currency | Local Currency | Foreign Currency | ||||
| Mortgage | |||||||
| 2001 | 33,284 | 185,913 | 3,390,328 | 5.6 | 101.9 | ||
| 2005 | 66,555 | 274,734 | 6,196,406 | 4.1 | 93.1 | ||
| 2008 1/ | 104,791 | 2,973,401 | 7,323,359 | 28.4 | 69.9 | ||
| Consumer | |||||||
| 2001 | 1,154,317 | 1,560,580 | 1,638,868 | 1.4 | 1.4 | ||
| 2005 | 1,938,821 | 4,269,238 | 2,008,523 | 2.2 | 1.0 | ||
| 2008 1/ | 4,277,283 | 13,940,206 | 3,273,927 | 3.3 | 0.8 | ||
As of end-November.
51. A recent assessment by the Peruvian authorities suggest that the vulnerability of households’ balance sheets to exchange-rate shocks is contained. Stress tests on mortgage-market debtors based on end-2006 data suggest that a depreciation 20 percent of the Nuevo Sol could raise the amortization burden on low-income household by 5–6 percentage points—to about 35 percent, a still manageable level.
References
Banco Central de la Republica del Peru (2008), “Dolarización de los Créditos Hipotecarios” en Reporte de Inflación, Enero del 2008, Lima, pp. 114 –16.
Billmeier, Andreas, and J. Mathisen (2006), “Analyzing Balance Sheet Vulnerabilities in a Dollarized Economy: The Case of Georgia,” International Monetary Fund, WP/06/173, Washington DC.
Kamil, Herman (2008), “A New Database on the Currency and Maturity Composition of Firms’ Balance Sheets in Latin America: 1992–2007,” International Monetary Fund, unpublished, Washington DC.
Lima, Juan Manuel, E. Montes, C. Varela and J. Wiegand (2006), “Sectoral Balance Sheet Mismatches and Macroeconomic Vulnerabilities for Colombia, 1996–2003,” International Monetary Fund, WP/06/5, Washington DC.
Rosenberg, Christoph, I. Halikias, B. House, C. Keller, J. Nystedt, A. Pitt and B. Setser (2005), “Debt-Related Vulnerabilities and Financial Crises: An Application of the Balance Sheet Approach to Emerging Market Countries,” International Monetary Fund, Occasional Paper No. 240, Washington DC.
Prepared by Maria Gonzalez.
In 2001, Peru ranked as the third most dollarized economies in Latin America, behind Bolivia and Uruguay.
This amount corresponds to about half of the banking system’s broad money.
This analysis is based on data provided by Kamil, Herman, 2008, “A New Database on the Currency and Maturity Composition of Firms’ Balance Sheets in Latin America: 1992-2007,” (unpublished: Washington: International Monetary Fund).
